Six MLPs To Own As Interest Rates Rise

By Dimitra DeFotis

Master Limited Partnerships face headwinds – dangerous headwinds despite the U.S. oil-and-gas production boom — as the cost to borrow money goes up, according to a fresh Ned Davis Research report.

So Ned Davis studied the playing field of roughly 100 energy MLPs and unveiled an “MLP Bond Bear Survival Portfolio” Thursday. The chief characteristic of the six names on the list: the ability to produce aggressive growth in distributions, as MLP dividends are called. MLPs with strong distribution growth in the next 12 months should outperform other MLPs by 15% per year, Ned Davis studies conclude.

Ned Davis took the MLPs with the highest distribution growth and then screened for a number of positive characteristics, including one that has come up time and again in the Barron’s MLP roundtables: a strong coverage ratio. That’s an MLP’s cash flow (earnings plus depreciation and amortization (also known as distibutable cash flow)) divided by total distributions. The higher the number above one, the more money an MLP has to not only cover the payout but raise it.

Amey Stone is Barron’s Income Investing blogger and Current Yield columnist. She was formerly a managing editor at CBS MoneyWatch, MSN Money and AOL DailyFinance. Her responsibilities included overseeing market coverage and personal finance topics. Prior to those roles, she was a senior writer at BusinessWeek where she authored the Street Wise column online and contributed to the magazine’s Inside Wall Street column. Topics covered included economics, corporate finance, Fed policy, municipal bonds, mutual funds and dividend investing. She co-authored King of Capital, a biography of Citigroup Chairman Sandy Weill. She is a graduate of Yale University and Columbia University’s Graduate School of Journalism.